Cautious Homeowners Not Seduced By Record-Low Interest Rates

There's very little anyone can do to convince Americans to take out a mortgage.

Mortgage interest rates are lower than they've been in at least 40 years -- 4.37 percent, as of September 23, according to data from the St. Louis Fed -- but by and large, no one seems to care. Sales of new homes in August were at their second lowest rate ever, Bloomberg reported last week.

"What can Dr. Bernanke do when the shift in attitudes is so profoundly psychological?" Gluskin Sheff chief economist David Rosenberg asks in his letter today (free subscription required). He points to a report in Wednesday's USA Today that says Americans are increasingly paying down mortgages instead of taking out new loans or refinancing.

According to USA Today, 30 percent of homeowners who refinanced 30-year mortgages in the second quarter of this year shortened the term of the loan to 15 or 20 years, meaning they'd have to pay it back sooner. There's also been a dramatic shift away from taking out loans against home equity (using second mortgages to get immediate cash). Freddie Mac, according to USA Today, says holders of its mortgages borrowed only $8.3 billion against their homes in the second quarter of this year, compared to $21.8 billion a year earlier. What's more, 22 percent of these people actually put money back into their equity, the third highest rate since at least 1985.

Americans are chastened, Rosenberg says, pointing to another USA Today piece that shows a broad shift in risk-taking. Fewer Americans are moving homes, and more are delaying marriage -- even as the rate of "cohabitation" of couples (oddly, only opposite-sex couples) is at an all-time high.

But despite any psychological shift, almost a third of Americans couldn't get a mortgage even if they wanted one, due to poor credit scores. Lenders now are more cautious, typically refusing mortgages to anyone with a credit score below 620. Indeed, banks are still dealing with a mess of struggling loans: lenders wrote off debt this year at a higher rate than any year since at least 1988.

The general expectation is that the Fed will engage in more quantitative easing next year. New York Fed president William Dudley dropped hints to that effect today. But, as Rosenberg says, even if that results in an even lower mortgage rate, "who cares?"

Comments

[Philip Martins]

03:53 PM on 10/03/2010

The National Association of Realtors reported truly ugly sales of pre-owned homes. The number plunged by 27% to a seasonally adjusted annual rate of 3.83 million, the lowest level since they came up with the first tally over ten years ago. What did they expect? A recovery?

http://realpropertycheck.com/latest/2010/08/the-real-truth-behind-todays-housing-numbers/

Clearly, the expiration of the home-buyer tax credit took its toll on the resulting figure. But the number also points to high uncertainty. With falling interest rates and banks unwilling to lend, there is really nowhere to go for many buyers, and no place to turn for the sellers. It is a classic catch-22 situation.

[Wupta]

12:45 PM on 10/03/2010

Our economy long ago was engineered towards debt. This was achieved through tax laws and government institutions which promoted debt. It would have been fair to say that this type of structure maintained properly provides for quality economy but when the balance was tilted towards banking and Wall Street stock manipulation then we were doomed in the long run. Now trying to reverse this broken model will require recognition of the truth and painful adjustments. Which we aren't doing. This sick economy will drag on for years until the natural forces will inevitably force us to quietly surrender to it.

[Wupta]

12:34 PM on 10/03/2010

This isn't news. Many knew this was the case with notes that had been securitized. Unfortunately in the haste of Dubya's to bailout the crooks, they never bothered to check the conditions and possibilities beyond the banking interests. They should have allowed the banks to fail. This would have left he investors. At that point the investors would have taken whatever they could and would have had to renegotiate principle reductions and allowed the home owners to keep their homes. The government could then have stepped in and provided cheap loans for the homeowners that qualified and made a profit without having to go hat in had to the banks for regulation bs.

[Wupta]

12:21 PM on 10/03/2010

Cost of housing still in a bubble. Government price supports through phony reductions of interest in lieu of market correction are failing, as it should. The current prices of homes still isn't in proper ration to average incomes. Current prices still need a 40 to 50% price reductions. This correction would have happened but for the bailout.

[thrashertm]

03:24 PM on 10/04/2010

Exactly. Nothing cures falling prices like...falling prices. Unfortunately, big government corporatists are interfering to prop up the banking and home building industries.

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[FreeSpeech4All]

12:03 PM on 10/03/2010

I would like to refinance my mortgage into a 15 year loan but I'm scared to death the mortgage company would screw me over with the fine print and I would somehow lose my home. The mortgage industry has shot itself in the foot with rampant fraud, and the consumer has no reason to trust their shady practices. The industry is now reaping the consequences of de-regulation and lack of oversight.

[castlerider]

04:54 PM on 10/02/2010

Isn't it high time Obama acted or pushed banks to help, or resolve mortgage problems from other possible angles, as if to win a decisive battle, of such utmost importance?

For instance, if we could place a 2-year moratorium on making it 60 days before a mortgagelender reported a late payment instead of 30, with another year retroactively going back, it'd immediately improve so many scores. -Well enough for people who've suddenly come on harder times but've adjusted in enough time like responsible people they are, so they could buy the home they want, or finally sell the home they've been needing sold to someone who wants it.
Of course, no one would want to be encouraging late payments, so make it conditional on getting back within the 30 day payment period for maybe 2 months before someone could enjoy the relief on their scores.
This ability to approve and BUY would release so much money back into the economy, thereby bringing jobs into the best private sector of all, smack dab in the middle of the economy, the home industry.
Almost 30% of Americans now're under 600 fico scores . It's killing us... And MUST be repelled against strongly in our war against a dysfunctional economy.
This would give people something to work towards, a strategy extremely welcomed... Too many people have simply been GIVING UP.!!!.
We MUST dump dead weight and get our ship back to speed and momentum

[Rhiana]

12:03 PM on 10/02/2010

I couldn't buy a house right now if I wanted to. We bought this house 10 years ago. A house we could afford, and paid 20% less than the appraised value. A couple houses on the street have been foreclosed and are sitting vacant. A couple more have been turned int rentals. Our house is now worth 25% less than what we paid for it. And 40% less than what it was appraised for when we bought it. So now we are "underwater" on our mortgage and owe far more than what we could sell it for.

I just hope neither my husband and I get transferred in our jobs. We couldn't afford to move anywhere. We are locked into this house, and in Michigan who knows if the housing values will ever recover.

[castlerider]

05:35 PM on 10/02/2010

Best of luck to you.

I think it will take about 6 to 8 years for home values to stabilize, then something like 2 more to begin to go back up again.

Our best hope is to keep making a stand against the kind of people and corporations who've been sending jobs overseas and to keep educating everyone around us of how greed is what's basically what's brought us where are now.. We need to make them more and more obvious to the masses so people will know better who NOT to ever vote for.

[Rhiana]

05:57 PM on 10/02/2010

I get really irritated by the people who blame the victims. Many many people are in the same situation I am in. People who have done nothing wrong but are just caught up in the circumstances. And they are called irresponsible, deadbeats or worse. I guess it is easier to believe it can't happen to you if you convince yourself those people brought it on themselves.

Fortunately right now I don't see us needing to move. I have a good local school for my kids. It is a nice neighborhood in a nice town. And so far, knock on wood, my job seems stable. But as we know things can change in a flash, and that does worry me.

And I don't think the government has done enough on this side of the problem. Foreclosures aren't good for anyone. Not the families, not the neighborhoods and communities, not even the banks.

[rbchilds]

11:55 AM on 10/02/2010

"There's also been a dramatic shift away from taking out loans against home equity (using second mortgages to get immediate cash)." Someone needs to do a little research, the reason folks aren't taking out second mortgages besides the obvious (fear of losing job) is that banks and mortgage companies aren't offering 2nd TD's. They will however give you a variable rate HELOC. Both use the collateral of the home as insurance, but a 2nd TD is a fixed rate loan with a given time for repayment, a variable rate HELOC allows for increased interest rates over time and allow the home owner who is not responsible to use the home as a ATM. Seems to me the banks haven't learned a thing, HELOC's are part of the reason for the mortgage crisis.

[Marturia]

12:23 PM on 10/02/2010

Gone are the days when the first home loan was like the 'first pancake', if it doesn't come out right you could always fix another one.

[Marturia]

11:45 AM on 10/02/2010

This could be one of the worst times to buy a forclosed home. Some people who have recently purchased a foreclosed home are now being sued by the former owners for occupancy. The banks are being exposed for misrepresented mortgage apps (a good thing), but now some of the folks who were wrongly evicted want their houses back. The problem is that the former owner only has the chance of sueing a big bank through a class action suit, so they target the new owners instead. What a hot mess!

[desertman]

11:53 AM on 10/02/2010

Not likely to stand. Title insurance must stand behind the sale.

[Marturia]

12:14 PM on 10/02/2010

Sure, if the purchaser actually buys Title insurance and takes up an owner's title insurance policy that covers them, not the lender. So many people don't seem to know the difference.

[mezcal]

05:09 PM on 10/02/2010

They may have to stand behind existing policies but they don't have to issue new ones.
This will kill all mortgage lending if it isn't resolved quickly.

http://www.nytimes.com/2010/10/03/business/economy/03foreclose.html?_r=2&ref=business

[Mike Armstrong]

11:35 AM on 10/02/2010

The interest rate on a loan which is not approved is irrelevant. Banks do not make loans on houses. You have misrepresented this fact as consumer disinterest. Go talk to a banker about a home loan and educate yourself.

[desertman]

11:55 AM on 10/02/2010

What is a 1st mortgage called? A loan correct?

[castlerider]

11:28 AM on 10/02/2010

It's disgusting how the Fed has NOT acted to resolve this from any possible another angle, as if to win a decisive battle, which is of such utmost importance.

For instance, if we could change, or place a 2-year moratorium on making it 60 days before a lender reported a late payment instead of 30, with a 1 year to retroactively go back, it would immediately improve so many scores well enough for people who've suddenly come on harder times but have adjusted in enough time like the responsible people they are, so they could buy the home they want, or so they could finally sell the home they've been needing to sell.
This would release so much money back into the economy and help jobs get going in the best private sector of all, smack dab in the middle of the economy, the home industry.
Close to 30% of all Americans are now under a fico score of 600. This Must be answered with a salvo in our war against a dysfunctional economy.
We MUST dump some dead weight and get our ship back to some speed and momentum.

[desertman]

11:58 AM on 10/02/2010

Yes that's what we need more credit extended to already max'd out borrowers. Like giving drunks more tequila.

[tinman1967]

11:02 AM on 10/02/2010

Americans are finally waking up are they? We've got several more years of this recession. Home prices will fall another 20%...maybe another 40% before it's all over. I pity the poor fool who buys a house now.
To make matters worse, the foreclosure process is coming to a hault at least on a temporary basis. We need to get the deadbeats out and good owners in before we have any real hope of a recovery.
We need to feel some pain. That hasn't even started yet.

[Rhiana]

12:13 PM on 10/02/2010

I am not a deadbeat. Shame on you. If I had to move right now, to take a different job, or care for an ailing parent, I would have to let my house go into foreclosure. It is worth 40% less than it was when I bought it 10 years ago. I can afford my payments. But I can't afford to move if the need arises.

I have a friend who went thru that exact situation. When he was transferred to a different AF base, the value of his house had dropped so much that he was forced into a short sale, and now his credit is ruined. He wasn't irresponsible. He was serving our country. And paying his bills.

This crisis affects us all.

[Wupta]

12:39 PM on 10/03/2010

For anyone who has bought a home this isn't the behavior of a deadbeat. It is a person who has engaged in the economy by putting his lives work and money into the American dream. I can't say the same for the crooks who are in Wall Street or the Bankers who shameless exploited this desire of your most productive unit in the economy. The self-righteous idiots who think labeling your average person a deadbeat is precisely the types that are working for the banks and wall street.

[ImperiumServorum]

10:26 AM on 10/02/2010

The government blows smoke and its bank blows bubbles. Quaint.

[vippy]

10:11 AM on 10/02/2010

The problem is simple.  Incomes have gone down and house prices have gone up.  If we don't see this then we are beyond help. 

[desertman]

12:00 PM on 10/02/2010

House prices will fall with income. That's how it works.

[Wupta]

12:40 PM on 10/03/2010

Precisely.

[bill111]

09:51 AM on 10/02/2010

Before you shorten the number of years on your mortgage, do the math. I think it pays to do a 30 year mortgage based on this. If you were to lose your job you might need the extra money to balance your monthly budget. Your option is to shorten the years is just to pay the difference in the loan amounts each month. If something happens just pay the payment for the 360 month loan.
Loan Amount Interest Rate Months Payment
$200,000.00 0.05 360 $1,073.64
$200,000.00 0.05 240 $1,319.91
$200,000.00 0.05 180 $1,581.59

[vippy]

10:13 AM on 10/02/2010

The best way to pay off a house early is to take out a 30 year loan and then pay more and ensure that you specify to take it off the principal NOT the interest.  That if your contract does not specify that you get penalized for paying off early!  But it worked for me. 

[Marturia]

11:53 AM on 10/02/2010

Congrats, Vippy, if your house is paid off. Besides just paying cash, that's the ideal situation. If a homeowner has had a good year, they can at the very least pay an extra house payment that year...and as you said, specify that the extra payment is taken off the principal.

[desertman]

12:02 PM on 10/02/2010

Once the interest portion of the payment is satisfied, the excess always goes to principal.

[phree]

04:43 PM on 10/03/2010

If you can't afford a 15 year mortgage, you cannot afford the house, especially with the low interest rates we now have. Don't buy if the house stretches your budget to the max as we are sure to see more mortgage fraud from the banks now that they are the welfare queens.